From the Courts

U.S. Supreme Court Rejects “Presumption of Prudence” for ESOP Fiduciaries

The plaintiffs in this case, former employees of Fifth Third Bancorp and participants in its employee stock option plan (ESOP), sued Fifth Third and various Fifth Third officers in a federal district court in Ohio, alleging that they knew or should have known by July 2007 that Fifth Third’s stock – the ESOP’s primary investment – was overvalued and excessively risky.

The plaintiffs asserted that a prudent fiduciary in the defendants’ position would have responded to this information by selling the ESOP’s holdings of Fifth Third stock before the value of those holdings declined and by taking other protective action. Instead, the complaint alleged, the defendants continued to hold and buy Fifth Third stock, the market crashed, and Fifth Third’s stock price fell by 74 percent between July 2007 and September 2009, when the complaint was filed. The complaint asserted that because the ESOP’s funds were invested primarily in Fifth Third stock, this fall in price eliminated a large part of the retirement savings that the ESOP’s participants had invested in the ESOP.

The district court dismissed the complaint, declaring that where a lawsuit challenged ESOP fiduciaries’ investment decisions, the fiduciaries started with a presumption that their “decision to remain invested in employer securities was reasonable.” The district court next held that this presumption was applicable at the pleading stage, and it then concluded that the complaint’s allegations were insufficient to overcome this presumption. 

The U.S. Court of Appeals for the Sixth Circuit reversed. Although it agreed that ESOP fiduciaries were entitled to a “presumption of prudence,” it took the view that the presumption did not apply at the pleading stage. Thus, the Sixth Circuit simply asked whether the allegations in the complaint were sufficient to state a claim against the defendants for breach of fiduciary duty, and it held that they were.

The dispute reached the U.S. Supreme Court, which ruled that, when an ESOP fiduciary’s decision to buy or hold the employer’s stock is challenged in court, the ESOP fiduciary is not entitled to a presumption of prudence. Rather, the Supreme Court declared, ESOP fiduciaries are subject to the same duty of prudence that applies to ERISA fiduciaries in general (except that, pursuant to federal law, ESOP fiduciaries do not have to diversify their fund’s assets because ESOPs are designed to invest primarily in the stock of the participants’ employer). The Supreme Court reasoned that the only distinction between ESOP fiduciaries and other ERISA fiduciaries generally was that ESOP fiduciaries could not be held liable for losses that resulted from a failure to diversify. Aside from that distinction, the Supreme Court stated, “because ESOP fiduciaries are ERISA fiduciaries” and because the “duty of prudence” applies to all ERISA fiduciaries, ESOP fiduciaries are subject to the duty of prudence just as other ERISA fiduciaries are.

The Supreme Court was not persuaded by the defendants’ argument that the purpose of an ESOP – investing participants’ savings in the stock of their employer – called for a presumption that such investments were prudent and, therefore, that a challenge to an ESOP fiduciary’s decision to hold or buy company stock could not prevail unless extraordinary circumstances, such as a serious threat to the employer’s viability, meant that continued investment would substantially impair the purpose of the ESOP plan.

In the Supreme Court’s view, the presumption of prudence would make it “impossible” for a plaintiff to state a duty-of-prudence claim, no matter how meritorious, unless the employer was in very bad economic circumstances. The Supreme Court then vacated the decision by the court of appeals and remanded the case to determine whether the allegations in the complaint were sufficient to withstand the defendants’ motion to dismiss in the absence of the presumption of prudence. [Fifth Third Bancorp v. Dudenhoeffer, 2014 U.S. Lexis 4495 (June 25, 2014).]

Circuit Court Denies Late Challenge to Decision Ending Long Term Disability Benefits

The plaintiff in this case worked for Deloitte & Touche, LLP until October 2000 when she learned that she was HIV positive and she claimed that she could no longer work due to depression. The claims administrator of Deloitte’s group long term disability plan, Metropolitan Life Insurance Company, determined that the plaintiff was eligible for disability benefits under the plan and began paying benefits effective March 3, 2001.

MetLife paid benefits through December 2002, explaining in a letter to the plaintiff that her treating physician had advised on December 19, 2002 that she had not been seen in over three months and had failed to appear for her last scheduled appointment. The MetLife letter also indicated that the plaintiff had not responded to calls from MetLife personnel, adding that benefits were terminated because the plaintiff had failed to furnish continuing proof of disability as required by the plan. The letter gave the plaintiff 180 days from receipt of the letter in which to send a written appeal to MetLife.

On January 9, 2003, the plaintiff appealed the termination to MetLife. After reviewing the medical information submitted in support of her continuing claim for disability benefits, MetLife denied her claim in a letter dated March 17, 2003. The letter informed the plaintiff that she had 180 days to appeal the decision.

On October 15, 2003, the plaintiff appealed, arguing that she was disabled due to severe and debilitating depression. In a November 4, 2003 letter, following MetLife’s review of the information submitted and a review by an independent physician consultant, MetLife informed the plaintiff that additional benefits had been approved for the limited period of January 1, 2003 through March 2, 2003, because she was disabled during that period by her major depression.

The letter explained that under the plan, the plaintiff’s benefits were limited to 24 months because her disability stemmed from a mental illness, and noted that her 24 months ended on March 2, 2003. The letter advised the plaintiff that she could appeal the decision within 180 days. The plaintiff failed to appeal but, on November 26, 2007, she called MetLife to ask whether her claim could be reopened and MetLife informed her that her appeal deadline had passed.

In April 2009, MetLife received a letter from California’s Department of Insurance indicating that the plaintiff had filed a complaint on April 12, 2009. The letter asked MetLife to reevaluate the issues raised by the plaintiff in her complaint. MetLife informed the plaintiff that it would reopen her claim for further review and allowed the plaintiff to submit any additional information that she wanted MetLife to consider.

On December 8, 2009, after reviewing the plaintiff’s file and the additional information available, MetLife informed her in writing that it was upholding its original decision to terminate her benefits based on the plan’s 24-month limitation for disabilities resulting from mental illness. The letter advised the plaintiff of her appeal rights, saying that she could appeal the decision within 180 days and that any appeal would be concluded within 45 days unless otherwise notified in writing. The letter also stated that if the administrative appeal were to be denied, the plaintiff would have the right to bring a civil action under Section 502(a) of ERISA.

The plaintiff timely appealed with a 74-page appeal letter and more than 480 pages of exhibits. MetLife wrote to the plaintiff’s counsel on July 6, 2010, advising that it was continuing to review the file. On January 31, 2011, before MetLife’s review was completed, the plaintiff filed a complaint pursuant to ERISA Section 502(a) in a federal district court in California.

The district court granted the plan’s motion for summary judgment, concluding that the plaintiff’s ERISA action was barred by a four-year statute of limitations. The district court rejected her arguments that the reopening of her file in 2009 reset the statute of limitations and that the plan had waived its limitation defense or was estopped from asserting it. The plaintiff appealed.

The U.S. Court of Appeals for the Ninth Circuit affirmed. In its decision, it explained that because there was no federal statute of limitations applicable to lawsuits seeking benefits under ERISA, it had to look to the “most analogous state statute” in the state where the claim for benefits arose.  In this case, the circuit court continued, the state was California and the most analogous statute was its four-year statute of limitations governing actions involving written contracts. 

The Ninth Circuit then examined when the four-year statute of limitations had begun to run. It pointed out that the plaintiff’s claim was denied in MetLife’s letter dated November 4, 2003, which advised her that no disability benefits would be available to her after March 2, 2003 and that she would receive one final payment covering the period of January 2, 2003 through March 2, 2003. The circuit court noted that the letter “explicitly stated” that the last payment was made in a full and final settlement of her claim for disability benefits under the plan.

The circuit court then reasoned that even if the November 4 letter was not a final denial because the plaintiff still had a right to appeal that would expire 180 days from November 4, 2003 – which meant on or about May 4, 2004 – the plaintiff’s right to file an ERISA action had begun to run no later than May 4, 2004. Given that the plaintiff had not filed her lawsuit until January 31, 2011, the circuit court said, the district court had correctly concluded that the plaintiff’s ERISA action was barred by the four-year statute of limitation.

The circuit court also rejected the plaintiff’s argument that MetLife’s reopening of the plaintiff’s claim file in 2009 revived the statute of limitations, explaining that reviving a limitations period when an insurance company reconsidered a claim after the limitations period had run “would discourage reconsideration by insurers even when reconsideration might be warranted.”

Finally, the circuit court also rejected the plaintiff’s argument that she should be able to challenge MetLife’s decision in court notwithstanding the statute of limitations because MetLife had represented in its December 8, 2009 letter that she could bring an ERISA action. The Ninth Circuit found that, by that time, the statute of limitations already had run and the plaintiff could not have relied on that statement to her detriment. [Gordon v. Deloitte & Touche, LLP, 749 F.3d 746 (9th Cir. 2014).]

Interns Were Not Employees Entitled to Protections of the FLSA, Court Rules

In this case, the plaintiffs were 25 former student registered nurse anesthetists (SRNAs) who enrolled in the nurse anesthesia master’s degree program at Wolford College, LLC, with the goal of becoming Certified Registered Nurse Anesthetists (CRNAs). While at Wolford, the plaintiffs participated as interns in a clinical training program supervised by Collier Anesthesia, P.A. Each plaintiff knew this was an unpaid internship program required for graduation, but the plaintiffs subsequently sued for payment of minimum wage and overtime compensation under the Fair Labor Standards Act (FLSA). A federal district court in Florida conditionally certified a collective action.

The parties moved for summary judgment. The defendants sought a ruling that the plaintiffs were student trainees, not employees, and, therefore, were not entitled to compensation pursuant to the FLSA. The plaintiffs sought summary judgment, contending that they were employees of Collier and Wolford within the meaning of the FLSA.

The court ruled that the plaintiffs were not employees of either Collier or Wolford and, accordingly, were not entitled to minimum wages or overtime compensation pursuant to the FLSA. In its decision, the court explained that the Department of Labor’s Wage and Hour Administrator identified six factors pertinent to determining whether a trainee qualified as an employee under the FLSA. Under this test, a trainee was not an “employee” if these six factors applied:

1. the training, even though it included actual operation of the facilities of the employer, was similar to that which would be given in a vocational school;
2. the training was for the benefit of the trainees;
3. the trainees did not displace regular employees, but worked under close supervision;
4. the employer that provided the training derived no immediate advantage from the activities of the trainees and on occasion the employer’s operations actually might be impeded;
5. the trainees were not necessarily entitled to a job at the completion of the training period; and,
6. the employer and the trainees understood that the trainees were not entitled to wages for the time spent in training.

The court then applied these factors to reach its conclusion.

First, the court found that the training received by the plaintiffs was similar to that which would be given in a vocational school and was related to the plaintiffs’ course of study. The court reasoned that Wolford was accredited by the Council on Accreditation of Nurse Anesthesia Educational Programs (COA); that the plaintiffs attended Wolford to become CRNAs; that the plaintiffs’ time at Collier served as the COA-required clinical portion of their master’s degree program; and that the plaintiffs received academic credit and grades for their clinical time, which allowed them to graduate and sit for the nurse anesthesia certification exam.

The court said that its conclusion was not changed by the plaintiffs’ contention that a portion of their time at Collier consisted of stocking carts, filling out pre-operative forms, and performing other work typically reserved for lower-level “anesthesia techs.” The court noted that an expert witness retained by Collier and Wolford had indicated that this work was part of a CRNA’s everyday activities, adding that even if this was incorrect and a CRNA was a job that required absolutely no ministerial activities, the activities the plaintiffs said they performed were at the very least “related” to the plaintiffs’ course of study.

The court then found that the training was for the benefit of the trainees, given that they “received academic credit for their work and . . . satisfied a precondition of graduation.” 

The court next decided that the third issue – that is, whether the trainees displaced regular employees and worked under close supervision – favored neither side, given that the parties disputed whether Collier used SRNAs as replacements for CRNAs and that the SRNAs may have performed some tasks without being closely supervised.

Next, the court ruled that there were genuine issues of material fact bearing on the fourth factor and that, for purposes of evaluating their respective motions for summary judgment, neither side could successfully claim this factor.

The court found that the fifth factor – whether the trainees were entitled to a job at the completion of the training period – was met by Collier and Wolford because it was undisputed that the plaintiffs were not entitled to a job at Collier at the completion of their clinical training period.

Finally, the court decided that it was clear that the plaintiffs understood that they were not entitled to wages for the time they spent in training.

Given its analysis of the factors, the court concluded that the economic realities of the case established that the plaintiffs were not “employees” of either Collier or Wolford and, therefore, were not entitled to wage or overtime compensation under the FLSA. [Schumann v. Collier Anesthesia, P.A., 2014 U.S. Dist. Lexis 71152 (M.D. Fla. May 23, 2014).]

Court Stays Uncompensated Security Screening Case Against Apple Pending U.S. Supreme Court Decision Expected Next Spring

The plaintiffs in this case sued Apple, Inc., on behalf of Apple’s current and former hourly-paid and non-exempt specialists, managers, and “genius bar” employees. The plaintiffs asserted that most hourly employees worked eight hours per day and 40 hours per week and that Apple required its hourly employees to clock-in when they arrived to work, clock in-and-out during meal breaks, and clock-out when they left for the day. The plaintiffs also claimed that Apple required its hourly employees to wait in line and undergo multiple off-the-clock security bag searches and clearance checks when they left for their meal breaks and after they have clocked-out at the end of their shifts. The plaintiffs cited Apple’s written policy, which stated:

General Overview:
All employees … are subject to personal package and bag searches. Personal technology must be verified against your Personal Technology Card … during all bag searches.
Failure to comply with this policy may lead to disciplinary action, up to and including termination.
Do:
Find a manager or member of the security team (where applicable) to search your bags and packages before leaving the store.
Do Not:
Do not leave the store prior to having your personal package or back [sic] searched by a member of management or the security team (where applicable).
Do not have personal packages shipped to the store. In the event that a personal package is in the store, for whatever reason, a member of management or security (where applicable) must search that package prior to it leaving the premises.

The plaintiffs claimed that these uncompensated security screenings could last between 10 to 15 minutes each time, including time spent waiting in line. Accordingly, the plaintiffs alleged violations of the Fair Labor Standards Act (FLSA), claiming that the time spent undergoing the security screenings was “hours worked” under the FLSA.

Apple moved for summary judgment against all individually-named plaintiffs on all claims, arguing that undergoing a security screening was not “work” because Apple did not require employees to undergo a security screening. According to Apple, its employees voluntarily chose to bring a bag or Apple device to work and, therefore, they freely volunteered to undergo a security screening.

The court denied Apple’s motion, finding issues of fact that necessitated a trial or at least a more comprehensive record.

Significantly, the court also pointed out that the U.S. Supreme Court had granted certiorari in Busk v. Integrity Staffing Solutions, Inc., 713 F.3d 525 (9th Cir. 2013), in which the U.S. Court of Appeals for the Ninth Circuit held that the time spent by hourly-paid employees in mandatory security screenings was compensable under the FLSA. The court explained that the Supreme Court’s ruling in Busk might control the outcome of all claims in the case against Apple except for California state-law claims asserted by the plaintiffs. The court then decided to stay the actions against Apple pending the Supreme Court’s ruling in Busk. A decision is anticipated by the Supreme Court in that case in the spring of 2015. [Frlekin v. Apple, Inc., 2014 U.S. Dist. Lexis 74226 (N.D. Cal. May 30, 2014).]

Plaintiff’s Failure to Disclose Misdemeanor Conviction Results in Employment Termination

After exhausting his administrative remedies through the Equal Employment Opportunity Commission and receiving a right-to-sue letter, the plaintiff in this case sued his former employer, Wal-Mart Stores, Inc. The plaintiff alleged that he had been terminated based on his age and disabilities in violation of the Americans with Disabilities Act (ADA) and the Arkansas Civil Rights Act (ACRA), and that Wal-Mart had failed to accommodate him under the ADA.

Wal-Mart contended that the plaintiff had been discharged for a legitimate, non-discriminatory reason, namely that he had failed to disclose in his employment application that he had a misdemeanor conviction.

In response, the plaintiff asserted that he had not disclosed the misdemeanor conviction on his employment application because the conviction was not a theft, fraud, or a violent crime. He further contended that failure to disclose this conviction on the Fair Credit Reporting Act Authorization Form (FCRA Form) he had signed was a mere omission and not intentional, and did not amount to falsification under Wal-Mart’s policy regarding background checks on the FCRA Form. He asserted that major depressive disorder and attention deficit/hyperactivity disorder caused him not to accurately complete his employment application.

The court granted Wal-Mart’s motion for summary judgment, finding that the plaintiff had not demonstrated “any factual relationship between his termination and his claimed disabilities.” According to the court, the plaintiff, at best, merely speculated that his disabilities played a part in his termination and he offered no evidence in response to Wal-Mart’s substantial evidence to show that the impetus for his termination was for any reason other than Wal-Mart’s discovery of his failure to disclose his criminal conviction. The court rejected the plaintiff’s argument that because he was diagnosed with depression and adult attention deficit disorder, a jury could find that these conditions caused him not to complete his FCRA Form. According to the court, “[o]ffering post-hoc rationalizations for his admitted behavior and attributing those excuses to his disabilities” were insufficient to show that Wal-Mart fired him because of his disability.

Accordingly, the court concluded that Walmart’s termination of the plaintiff was based upon a legitimate, non-discriminatory reason, entitling it to judgment in its favor. [Busch v. Wal-Mart Stores, Inc., 2014 U.S. Dist. Lexis 69140 (W.D. Ark. May 16, 2014).]

Reprinted with permission from the September 2014 issue of the Employee Benefit Plan Review – From the Courts.  All rights reserved.